Posted on Sunday, October 11, 2009
Thoughts about the one year anniversary of TARP
What does it tell us when even the TARP Congressional Oversight Panel can’t say whether TARP’s working or not? With some of the programs winding down now, the need for mortgage loan modifications and perhaps also small business lending still seems obvious.
• The Treasury’s money market mutual funds guarantees expired in September.
• The Treasury appears to not be pursuing initial plans to purchase toxic assets.
• It looks as if the FDIC guarantee of bank debt will expire at the end of October (though there is some talk of a possible short term extension).
• The plan to buy illiquid mortgage loans and securities never seemed to get going even thought the original point of the Troubled Asset Relief Program (TARP) was to buy troubled assets. The latest incarnation is the Public Private Investment Program (PPIP) which opponents argue is not needed. It seems at least some banks have been able to attract capital on their own. The Feds initially proposed to auction wholesale mortgage loans by helping to guarantee financing for investors but the plan now is to sell assets from failed institutions. Some feel the fact that banks have attracted capital makes their bad assets less of an issue. But others recognize that this is still a problem for smaller banks. Truth is no one really knows how big the problem is. And with the FDIC running out of money to step in, it seems the writing is on the wall that something’s got to give. Leaders are pushing for banks to come up with some of the funds most anticipate will be needed over the next few years.
• The seizure of FNMA and Freddie and how that will play out is still in question. Together with Ginnie Mae, they still dominate the housing market, another variable that may play out with notable repercussions.
• FHA has been filling some of the gap with new loans to first time home buyers amid fears that the same mistakes are being repeated all over again. FHA standards are lower than FNMA or Freddie, but still not even close to some of the subprime standards we saw before. FHA does not offer 125% financing, no doc or neg am loans. Even FHA has increased its down payment requirement and tightened its credit requirements. FHA has also increased it insurance requirements in a steps towards being self sustaining. Believe it or not, some borrowers are actually turned down for an FHA loan. But FHA has been plagued by a history of fraud. And the 3 to 5% small down payment, which sellers can funds, risks walk away especially with price still falling potentially even after a home is purchased. Conventional loans requiring 20 to 25% down may not even fair well in some areas. Borrower need to have something at risk, but it seems we all have less money to save than before. But there is no perfect option,. We can either expand FHA and absorb some market share with the risk on knowing some of these new loans will go bad. Or not absorb the inventory and sit and wait.
• The Federal Reserve’s Term Asset Relief program (TALF) may have helped jump start the consumer loan market but the CMBS market is still non-existent. Developers do not seem to want to use the TALF program. The program has been extended until June 2010. One reason may be the appearance that firms working with TALF are distressed, that lenders don’t see a company as otherwise fit. Other factors its takes a long time to get TALF deals done, the LTV is about 40%, cap rates are conservative, they are high cost and require dealing with the government. The properties pooled have to be unencumbered but most properties in portfolios are highly leveraged.
This all only about half of the original $700 billion bailout was advanced. Bailout advocates argue that the mere the existence of these programs help turn things around. Of the funds advanced, banks have repaid about $70 billion of the TARPs capital purchase program. About another $50 is expected to be recovered in the next year or so.